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Proletarian issue 23 (April 2008)
Economic crisis: the dance of death
The question is not whether there will be a recession, but how deep it will be.
“Capitalism without failure is like religion without sin,” announced Carnegie Mellon professor Allan Meltzger recently, stating in unequivocal terms the unavoidable truth that capitalism cannot but be wracked with periodic crises, such as the one we are currently undergoing.

The crisis is not unlike that which would have been undergone by tradesmen in centuries gone by supplying every luxury to some noble family on credit in the belief that one day they would be paid, but then finding that their debtor has been hauled off to the debtors’ prison or has died bankrupt.

So long as there was ‘confidence’ in the insolvent party, there was fervent economic activity, employment for an army of workers, and supply contracts benefiting traders far and wide. When finally the ‘confidence’ turns out to have been utterly misplaced, it is not only the tradesmen dealing directly with the penniless lord who suffer bankruptcy and humiliation, but also all those who worked for them and those who supplied to them.

Of course, today the crisis is far more complex and infinitely further widespread, but the principle is the same.

One major difference, however, is that the penurious debtor is not a member of the nobility recklessly running up debts he knows he will never be able to pay. The penurious debtor at the end of the line is the mass of the people who have been impoverished under the iron law of capitalism, which dictates that the poor get ever poorer and more numerous while the rich get ever richer – albeit fewer.

The unpaid creditor is not a hardworking and oppressed tradesman, but a rapacious loan shark – ie, the banking system. Roles are reversed. It is not, in the first instance, the oppressed who are being bankrupted by the oppressor, but the oppressor who is being bankrupted by the oppressed – not deliberately so but because, as a result of the impoverishment of the consuming public and nations, capitalism is not able to find purchasers for all its output and thereby maintain its expansion.

Less competitive capitalist concerns can no longer sell enough to be able to survive. When they collapse, it causes still more general impoverishment – a vicious spiral that lasts for years until surviving capitalists are able to operate profitably and expand once more, when the whole of the economy recovers, gingerly at first but then picking up speed in an upward vortex, only to collapse yet again a few years later.

Phony war

Although it was about a year ago that the current crisis began to become apparent, as a result of mass defaults on the part of subprime borrowers in the United States, it is only now that problems are beginning to extend beyond the banking system to hit not just the capitalist class but the proletariat, who now, as always, will be required to bear the brunt of the crisis. Some things never change. Up to now, however, all has been relatively quiet:

“… apart from the still relatively small number of US households facing foreclosure, the fallout for companies and households around the world has thus far been limited.

“Half a year into the credit squeeze, unemployment in the 30 rich countries represented at the Organisation for Economic Cooperation and Development stood at 5.5 per cent, 0.3 percentage points lower than a year earlier. Even in the US, the proportion out of work has risen only 0.3 percentage points in the 12 months to February. Last year was simply a stunning one for economic growth, rounding off the best global four-year period for more than 30 years. The International Monetary Fund’s latest estimate puts world economic expansion at 4.9 per cent.

“In short, the global economy is in the middle of a phoney war. The future appears bleak but the present still looks relatively rosy.”
(‘An economy undermined?’ by Chris Giles, Financial Times, 19 March 2008)

Unfortunately, this state of affairs is not going to continue.

Squeeze extends to home loan market

Up to now, difficulties have centred around the fact that banks have become unwilling to lend to each other in case the recipient is burdened with losses that have not yet been declared and is about to default on its debts.

All banks have to put the vast amounts of money that they accumulate somewhere, and all have been investing in assets which, at the end of the line, depend on debtors paying their debts. With mass default on the part of borrowers, banks have had to revalue their assets downwards, writing off billions of pounds and dollars worth of debt that will never be collected.

The amount of money lost by banks has been enormous. In America, Citigroup lost $18bn, Merrill Lynch $19bn, UBS $13bn and Morgan Stanley $9bn. Of the UK banks, HSBC was forced to write down $10.6bn in February last year. RBS has written down a rather modest £1.3bn but is believed still to have a £12.5bn gap in its finances, equivalent to nearly a third of its existing capitalisation. It does, however, have assets, such as its stake in Bank of China, which it could possibly sell to make good its cash shortage. Barclays has written down £1.25bn, but experts believe that both Barclays and RBS may have to write down a further £3bn each in 2008!

The net result of all this is that banks have less money to lend, either to prospective home owners or to business. Because there is less money available for borrowing, the interest rates charged have become higher and the chances of obtaining a loan have reduced.

This is in spite of the fact that both the Federal Reserve in America and, to a lesser extent, the Bank of England in the UK, as well as the European Central Bank, have substantially reduced the interest rates that they charge to banks borrowing from them and made vast sums available for borrowing on relatively easy terms as they try to unblock the paralysis that besets the banking system.

However, in mid-March, home lenders all announced measures to restrict lending:

“Cash strapped borrowers are facing increasing difficulties in getting a mortgage as lenders seek to protect their margins. A scarcity of funding for lenders on the credit markets has led most banks and building societies to raise their rates and become more picky about their customers. Homebuyers who do not have a 5 per cent deposit are now struggling to get a mortgage.

“A significant number of lenders, including Nationwide, the UK’s biggest building society, are charging higher rates for borrowers who do not have a 24 per cent deposit”
. (‘Housebuyers struggle as lenders increase rates and pull deals’ by Graine Gilmore, The Times, 21 March 2008)

Inability to obtain a mortgage is a factor that will reduce demand for housing and force down house prices, and, indeed, Nationwide has already reported that average house prices in the UK have now fallen for the fourth month in a row.

Where the squeeze on the working class is going to be tightest, however, is in being forced to pay higher interest rates on existing mortgages. Nearly a million people are already finding their debts unmanageable, but it is now being estimated that 3 million people face an increase of up to £300 a month on mortgages when they seek to refinance when their current ‘deal’ expires.

This will, of course, lead to many what were perfectly good mortgage debts when interest was low now going sour because the debtors cannot afford the higher repayments, while at the same time the price that can be obtained on a sale of the property mortgaged has plummeted because of the restricted availability of mortgages.

This is likely to be a widespread problem and will considerably exacerbate the banking crisis as banks and other lenders, as well as those who hold debt-based securities, will have to once more revalue their assets downwards.

Effect of default on share prices

Since everybody can see that not only have banks lost a great deal of money because of the subprime crisis but that they can be expected to lose a whole lot more in the future as a result of increasing default and falling property prices, bank shares have suffered massive losses on stock exchanges throughout the world, notwithstanding the fact that many banks are announcing record profits!

According to Simon Watkins in the Mail on Sunday, “The big banks are expected to report a record profits total of about £40.5 billion for 2007 – up from £39.5 billion the previous year”. (‘Banks’ profits hit a record £40.5bn’, 10 February 2008)

Yet, according to Philip Aldrick, writing in the Daily Telegraph, “Bank shares are moribund, having fallen 30pc since August. They now trade on as little as five times forecast earnings in Royal Bank of Scotland’s case.” (‘UK banks will fend off danger – for now at least’, 11 February 2008)

In other words, people will not buy Bank of Scotland shares except when financial forecasts predict a return of 20 percent per annum on their investment. That is to say, the low price of shares reflects the fact that investors (a) have little faith in the financial forecasts because they are aware that future write-downs are likely to eat into profits, and (b) that there is a danger that the price of the shares will fall because it is well understood that in the same way that Northern Rock has collapsed in the UK and Bear Stearns in the US, other banks may well follow suit, leaving the investor badly out of pocket – unless he has managed to sell and move on before the music stops!

In fact, on 16 March, in the week following the collapse of Bear Stearns, when that bank’s shares were initially sold to JP Morgan for £116m (less than 1 percent of their value just one year ago!), stock exchanges everywhere suffered meltdown. (JP Morgan has since been forced to offer somewhat more for the shares, but the price is still a fraction of their previous value.)

Halifax Bank of Scotland, Britain’s biggest mortgage lender, lost 13 percent of its value in just one day, and Barclays and Royal Bank of Scotland lost 9 percent of their share value. The FTSE 100 plunged to a two-year low of 5414, a one-day drop of nearly 4 percent.

This comes on top of the fact that “The credit crunch has helped reduce the value of the top 100 companies by almost a fifth. In addition the stock market slump wiped £8 billion off the value of the 200 biggest defined benefit pension funds, which include final salary schemes.

“The collective funds fell from a surplus of £15 billion at the end of Friday
[14 March] to a surplus of £7 billion last night [17 March]. (‘Financial crisis is worst for decades’ by Gordon Rayner, The Daily Telegraph, 18 March 2008)

All this means that pensioners will suffer once again as the funds in which their accumulated compulsory savings are invested struggle to meet their commitments. Anybody whose pension depends on retirement funds being invested in an annuity (rather than those whose pension is a fixed amount calculated by reference to final salary) would be in a dire position if he retired on Tuesday 18 March rather than on Friday 14 March, as his savings would have lost a large proportion of their value over the weekend!

Another result of the credit crunch therefore is that millions of pensioners all over the world will have smaller pensions. For them it means a miserable existence. For capitalism it means yet more demand taken out of the economy, reduced sales, and more companies going to the wall.

The effect on jobs

Because businesses are finding it difficult to borrow, many will also succumb to liquidity problems and be forced to close, with the loss of thousands of jobs. Of course, jobs have been lost already in the banking sector, and future losses are already announced.

Chris Hughes of the Financial Times reported on 19 March that “Job losses accounting for about 15 per cent of the US and European investment banking industry have become a near certainty in the first half of this year.” 65,000 such jobs have already gone since August. (‘Banking jobs to be cut by 15%’)

However, job losses will not be restricted to banking, as can already be seen in the US. Reporting on US employment statistics for February, Michael M Grynbaum notes that:

“The private sector lost 101,000 jobs last month, the biggest drop off in five years. Retail stores shed 34,000 jobs, while the manufacturing sector lost 52,000 workers and construction firm payrolls shrank by 39,000 jobs.

“The loss in February was the second consecutive monthly decline in the labour market …”
(‘US economy lost 63,000 jobs in February’, International Herald Tribune, 7 March 2008)

It is not clear whether job losses in the private sector were to some extent offset by job gains in the public sector, which seems unlikely, or whether Mr Grynbaum’s editor adjusted the figure in the headline but did not touch the text. Later on in the article, Mr Grynbaum goes on to speak of 450,000 people having left the labour force in February. Although the figures are impossible to reconcile without further information, the general point is nevertheless clear.

Greater unemployment means not only a loss of spending power on the part of those who have become unemployed, but lower wages on average for those who remain in employment caused by greater competition for jobs, which allows employers to offer lower salaries and to refuse to increase salaries being eroded by inflation, secure in the knowledge that any employee who leaves can easily be replaced.

Other factors compounding the misery

If traditional avenues of investment are proving unreliable, and investment in production is unlikely to be profitable because of the impoverishment of the masses, where are the rich going to put their money for the purpose of making profits?

Some other form of speculation is needed and what they have hit now is commodities (especially oil) and gold. Gold reached over $1,000 an ounce at one point before suffering rather a sharp decline when somebody realised the price was ridiculous. However, the demand for oil has pushed its price to an incredible $110 a barrel.

The price of oil was already rising because of falling production levels brought about by imperialist warmongering in the oil-producing zones, and because of increased demand from the emerging economies of Russia, China, India and Brazil. Now speculators are driving the price still higher.

Rising oil prices have in turn led to rising production costs for all the necessities of life (food, clothing, fuel, etc), and prices have therefore risen. The result of all this will be, according to Howard Flight, writing in The Daily Telegraph, that “In Britain, consumption and living standards will fall by some 10 per cent over the next two years, as a result of a return to saving, the limited ability to finance further consumption from remortgaging and other borrowing, and because of higher mortgage interest costs, as fixed-rate mortgages come up for rollover. In addition, there is also the prospect of sterling depreciating further, particularly against the Chinese Renminbi, reversing to some extent the major improvement in our terms of trade over the past decade and causing higher prices for imported consumer goods.” (‘Brace yourselves for two years of misery’, 18 March 2008)

Another question that will affect the spending power of the working masses in Britain and the US is the fact that they will in all probability face higher taxation to meet the cost to government of bailing out failed banks.

Furthermore, the British economy has also been very dependent on the British masses being prepared (and able) to borrow in order to spend.

“British household debt is 103pc of GDP, surpassing the highs seen in America at the peak of the credit boom. We have been withdrawing £50bn a year in home equity, spending our paper profits at a rate of 4pc of GDP”. (‘Global Storms will blow this budget away’ by Ambrose Pritchard-Evans, The Daily Telegraph, 13 March 2008)

British people now owe more than £1.3tr on loans, credit cards and overdrafts, but clearly with falling house prices and a general reluctance of lenders to lend, this boost to economic activity will be lost.

Indeed, “Credit card companies are cutting the borrowing limits of tens of thousands of customers.

“HSBC, Halifax and Co-Op are taking action amid the financial crisis, says the personal finance website MoneySupermarket.com. Industry sources said MBNA and Capital One had been ‘aggressively’ lowering credit limits and rejecting a greater number of people applying for cards.

“Customers are typically being told that their credit limit is being cut by around 10 per cent, reducing someone on a £5,000 limit to £4,500, according to Steve Willey, the head of cards at MoneySupermarket.com.

“The Co-Op said that up to 50,000 of their customers had seen their credit limits reduced. The price comparison website MoneyExpert said that 500,000 people were having card applications rejected every month.

“Last month Egg cancelled the cards of 161,000 customers, many of them with excellent credit histories.”
(‘Credit card firms curb customers’ spending’ by Harry Wallop, The Daily Telegraph, 19 March 2008)

The reduced ability of British consumers to wield their credit cards is bound to lead to thousands of job losses and failed businesses.

A specific problem for the UK is that it is so dependent on the financial services ‘industry’, which accounts for some 11 percent of the economy. It follows that the current financial meltdown has the potential to be proportionately far more serious in this country than anywhere else in the world. If thousands of Hooray Henrys and Hetties lose their city jobs, massive bonuses and enviable incomes, it will affect a much larger proportion of the population engaged in providing these people with café lattes, estate agency services, legal services, entertainment services, and so on.

With the economic forecast so poor for the UK, it is also expected, as indicated by Howard Flight, that the exchange rate of sterling will fall, leading to higher prices for imported goods, many goods already being more expensive as a result of increased demand for necessities from countries where living standards have been rising fast, such as China and India in particular.

The conclusion? “As clothing, footwear and consumer goods … become relatively more expensive, we will need to rediscover some of the skills of yesteryear: sewing, mending, darning and patching.” (‘Sorry, but it’s payback time’ by Dan Atkinson, Mail on Sunday, 16 March 2008)

Conclusion

The dry statistics that are enumerated above tell us nothing about the human misery that is created by the joblessness, homelessness, and poverty that will afflict millions of workers, pensioners and their dependants in the coming few years until the economy picks up once more.

In a socialist planned economy, where production is for the purpose of satisfying people’s needs rather than for the purpose of producing capitalist profit, these periodic crises, with their terrifying destructive power, simply do not occur. Even the efforts of imperialism to disrupt any socialist planned economy by every possible means, however foul, do not prevent the masses of workers becoming ever richer, not ever poorer.

It is so glaringly obvious at times like these that imperialism, with its irrational economic tsunamis, its ceaseless wars and its planetary destruction, must be overthrown, enabling the working class in power to establish ever-expanding socialist planned economies that will, after the final defeat of imperialism worldwide, very rapidly grow to meet all their needs, be they physical or cultural.

When that happens, the uncontrollable economic turbulence characteristic of capitalism, which we now accept as an unavoidable and unpleasant fact of life, will become not only a thing of the past, but something totally incomprehensible to people who have at last been able to establish genuine civilisation.
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